How to get value from IT in a downturn

How to get value from IT in a downturn
Richard Bhanap says now is the time to shake up the IT landscape in ways that might not be tolerated in more prosperous times

Published: January 19 2009 08:50 | Last updated: January 19 2009 08:50

In turbulent times, standard cost containment exercises such as tightening expense approval procedures, limiting new work commissions and restricting recruitment and travel can be effective. But they are rarely game changing. Typically, they must be backed by more sustainable cuts.

Here is a three-pronged approach to cost reduction that paid off for a global manufacturing company which found its €560m annual spend on application management unsustainable.

Its disparate systems, applications and management teams were spread across geographies and business units. Duplication, complexity and a high degree of local customisation made it difficult to extract value.

Over a 20 month period, it reduced its like-for-like yearly applications management spend by 12 per cent, broke even on its investment by the start of the third year, and is on target to achieve 30 per cent reduction in annual spend by the end of year three.

As the programme leader says: “The analysis, strategising and execution for a programme like this needs careful thought, design and planning. But it’s really all about the power and the politics. You need a burning platform to stand a chance of getting the mandate to do this.”

That’s exactly the opportunity that current business conditions present. So what is required?

Like it or not, one of the fastest and most effective ways to reduce IT spend is to abandon projects. However, the reasons why the expenditure was needed in the first place will inevitably resurface, probably more acutely, further down the line.

Rather than taking a hatchet to the IT project investment portfolio, effective cost-cutting techniques include:

● raising the bar in terms of what constitutes an IT priority;

● eliminating duplicate initiatives across business units;

● leveraging investments to deliver value across multiple geographies; and

● re-scoping and re-phasing projects to fit within tighter funding constraints.

Meanwhile, the resulting IT project investment portfolio must tell a coherent story that is tightly aligned to current business priorities.

Longer-term structural change is more painful. But tough times call for tough measures. Relatively uncontentious are savings from rationalising the IT infrastructure footprint through global data centre consolidation and server virtualisation.

More highly charged, both politically and emotionally, are attempts to optimise the business application systems landscape. Business units, which tend to own these systems and their associated spend, guard them fiercely. A proliferation of overlapping or duplicate systems and applications may evolve when business units operate in silos and pursue unilateral solutions to similar problems.

As a consequence, some large organisations admit that their IT application landscapes cost up to one-third more to maintain than they should. For a company spending £1bn a year on IT, that’s £100m or more in wasted value.

Now, armed with tighter budgets and a pressing need to cut costs, IT executives have more clout to optimise spend. There are three steps to optimisation:

1. Gain control and establish transparency of applications-related spend and activity.

2. Constrain demand for change to applications systems.

3. Reduce the cost of executing each change.

IT executives need to break the mentality that has led to the proliferation of applications. Greater savings are typically achieved by taking a cross-organisation approach to optimisation rather than a business unit, function or geographic focus.

First, establish the current total spend for maintaining the applications landscape. Then, unify responsibility for managing this spend. Finally, for the overall applications landscape, create heat maps that identify:

● those applications which consume the greatest spend, and the business or technical drivers of that spend;

● the degree of duplication or overlap of applications.

To control investment and drive convergence, applications on the heat map should be labelled:

● Strategic – technically sound and key to the future success of the business.

● Sunset – tagged for future decommission.

● Legacy – non-strategic; no replacement plans currently in place.

It then requires a disciplined approach to sift out changes that do not genuinely and directly address business imperatives.

Heat maps help pinpoint opportunities to rationalise or decommission high-cost applications and can be used to prioritise change requests and to challenge or block “sunset” and “legacy” application modifications. The simpler the resulting applications landscape, the lower its cost of maintenance.

Heat maps also highlight applications that are prone to failure or which need frequent change due to poor design. So, by remediating critical applications which consume significant spend, the effort and costs of implementing change are reduced.

Other actions are also needed: rethink the application delivery model; assess whether the unit cost of change and effort can be reduced by changing the mix of onshore, nearshore or offshore working; identify whether application management resources can be relocated and concentrated into fewer larger solution centres to achieve economies of scale and meaningful productivity improvements; and consolidate spend with vendors to fewer strategic suppliers aligned to the new IT delivery model.


Richard Bhanap is the outgoing head of KPMG’s European IT Strategy and Performance practice

Copyright The Financial Times Limited 2009